Minutes of the Monetary Policy Meeting
on March 19 and 20, 2007


III. Summary of Discussions by the Policy Board on Economic and Financial Developments

A. Economic Developments

On the current state of Japan's economy, members concurred that it continued to expand moderately, and was likely to experience a sustained period of growth as a virtuous circle of production, income, and spending was likely to remain intact.

Members agreed that overseas economies taken as a whole continued to expand, with more economies gaining momentum, and were likely to keep expanding.

Members concurred that the U.S. economy as a whole continued to expand
moderately as private consumption kept increasing steadily, although housing investment
continued to decrease. Many members said that the risks associated with the adjustments
in the housing market should continue to be watched carefully given that concerns about the
increase in delinquency rates for subprime mortgage loans had been rising recently.

Some members commented that attention should also be paid to the risk of an increase in
non-subprime mortgage loan delinquency rates and to the effects of the disposal of
foreclosed assets on housing prices.

One member added that the influence of the recent developments in subprime mortgage loans on overall consumer loans and the liquidity risks associated with securitized instruments backed by subprime mortgage loans also warranted attention. One member noted that although delinquency rates for mortgage loans were increasing, they were still at low levels compared with rates in the 1990s, and the increase in delinquency rates for subprime mortgage loans had not been very widespread.

Meanwhile, many members expressed the view that close attention should be paid to
whether inflation pressures were contained, as the core CPI had been increasing moderately.
Based on these discussions, members concurred that both upside and downside risks should
continue to be borne in mind, although the current standard scenario was that the U.S.
economy was likely to realize a soft landing in which the economy would approach its
potential growth rate in or after the middle of 2007.

With regard to European economies, members agreed that economic recovery
continued to be solid in the euro area, with domestic and external demand well in balance.
A few members said that no significant impact of the increase in the value-added tax rate in
Germany had so far been observed. On East Asian economies, members concurred that in
China both domestic and external demand continued to expand strongly, as evidenced by
developments such as the accelerating pace of growth in exports. They also agreed that
the NIEs and ASEAN economies continued to expand at a moderate pace on the whole.

One member expressed the view that although crude oil prices had recently been
around the level of late December, they should continue to be watched carefully since they
could fluctuate widely depending on factors such as developments in inventories of crude
oil in the United States and geopolitical risks.
Regarding Japan's economy, members concurred that exports had continued to
increase, reflecting the expansion of overseas economies, and were likely to continue to
increase.

As for domestic private demand, members shared the view that business fixed
investment continued to increase, as indicated by some sources such as the Financial
Statements Statistics of Corporations by Industry, Quarterly, and was likely to keep
increasing, reflecting the ongoing growth in domestic and external demand and also the
continuing high level of corporate profits.

Members agreed that private consumption had been firm and was likely to follow
a gradual uptrend, mainly reflecting the gradual increase in household income. Many
members commented that indicators for January relating to retail sales, such as sales at
department stores and supermarkets, showed improvement, adding that sales at department
stores for February also seemed to have been favorable. Meanwhile, one member noted
that there were increasing regional differences in the momentum of growth in consumption
and added that these increasing differences should be borne in mind when assessing the
underlying trend.

Members expressed the view that production had remained on an increasing trend
even though it had recently decreased marginally in reaction to the upsurge in the
October-December quarter of 2006. They also said that production was likely to continue
to be on an upward trend against the background of the rise in domestic and external
demand.

Members concurred that inventories had been more or less in balance with
shipments in the industrial sector as a whole, although inventories of electronic parts and
devices had been at a high level relative to shipments. Some members expressed the view
that, although global demand for IT-related goods remained firm and the risk that
adjustment in inventories might become widespread seemed small, attention should
continue to be paid to developments in inventories of electronic parts and devices since the
pace of increase in production capacity tended to be rapid in this sector.

One member said that, given the current developments in IT-related markets and orders for IT-related goods, the inventory adjustment in the IT-related sector might be more prolonged than expected.

As for the employment and income situation, members concurred that, in a
situation where various indicators had continued to show tighter labor market conditions,
household income had continued rising moderately, supported by the increase in the number
of employees. They also agreed that the gradual increase in household income was likely
to continue against the background that firms were increasingly feeling a shortage of labor
and corporate profits were expected to remain high. With regard to developments in
wages, a few members said that firms seemed to be maintaining a cautious stance on wage
increases, as indicated by their offers in the wage negotiations in spring 2007.

One member expressed the view that the recent sluggishness in the statistics for wages per
worker was partly due to the following factors: a shift in the composition of the workforce
from the elderly, whose wage levels were relatively high, to the young; the fact that
employment was increasing mainly in industries where the average income was relatively
low, such as services; and a reduction in the salaries of local government employees.

Members concurred that the year-on-year rate of change in the CPI (excluding
fresh food, on a nationwide basis) was likely to be around zero percent in the short run,
mainly due to the drop in crude oil prices, but from a longer-term perspective it was likely
to continue to follow a positive trend as the output gap continued to be positive.

Many members said that the year-on-year rate of change in the CPI (excluding
fresh food, on a nationwide basis) for February might be slightly below zero percent due
mainly to the effects of the past drop in crude oil prices and the introduction of low-cost
billing plans for cellular phones. A few members expressed the view that there might be
similar developments in March and for some time thereafter. Many members commented
on the fundamental environment surrounding prices that, given the increase in the
utilization of resources such as production capacity and labor, upward pressures on the CPI
were likely to increase if the economy continued to grow at a rate exceeding its potential.

One member said that attention should be paid to the possibility that the relationship
between the increase in the output gap and the increase in the CPI might have changed in
recent years, and to the fact that services prices were affected by wages in the
nonmanufacturing sector.

As for developments in asset prices, one member commented that developments in
the real estate market, including the data in Land Price Publication to be released shortly,
should continue to be examined closely, as office rents in metropolitan areas were
increasing. A different member said that there was further polarization in the real estate
market, noting that the active buying and selling observed in some areas had not become
widespread.

B. Financial Developments

On the financial front, members discussed the fall in global stock prices since late
February. Many members were of the view that risk-taking activities of market
participants might have become somewhat excessive in the wake of a further decline in
market volatility, but any such behavior seemed to have been modified in response to the
plunge in the Chinese stock market and some negative developments in the U.S. economy.

One of these members added that accounting fraud involving some listed firms might have
been one of the factors behind the decline in Japanese stock prices. Many members said
that the appreciation of the yen since late February seemed to be attributable to position
adjustments by market participants.

Based on the above discussions, members agreed that although the fall in global stock prices since late February did not seem to suggest a change in global economic trends, developments in financial markets continued to warrant close attention since they could influence economic activities.


IV. Summary of Discussions on Monetary Policy for the Immediate Future

On the monetary policy stance for the immediate future, members agreed that,
based on their assessment of the economic and financial situation, it was appropriate to
maintain the current guideline for money market operations that the Bank would encourage
the uncollateralized overnight call rate to remain at around 0.5 percent.

One member commented on the policy change in February that the Bank could have waited until it had fully explained its assessment of economic activity and prices in the April 2007 Outlook for Economic Activity and Prices (hereafter the Outlook Report). The member continued that it would nevertheless be appropriate to maintain the current guideline for money market operations for the following reasons. First, reversing policies frequently could cause unnecessary confusion in the market. And second, the present policy interest rate of
around 0.5 percent seemed warranted for the purpose of maintaining and strengthening the
proper functioning of the money market.

As for developments in the money market since the policy change in February,
many members said that the Bank had managed the uncollateralized overnight call rate at
around 0.5 percent well, albeit with a temporary rise in the rate toward the end of February.
These members were of the view that market participants had adapted smoothly to the
policy change without significantly altering their view regarding the future course of
interest rates, as evident in the fact that interest rates on term instruments had been more or
less unchanged.

Members concurred that it would be appropriate to keep their basic thinking on the
future course of monetary policy unchanged: the Bank would adjust the level of interest
rates gradually in the light of developments in economic activity and prices, while
maintaining the accommodative financial conditions ensuing from very low interest rates
for some time.

A few members said that the Bank should explain repeatedly that adjustment of interest rates would be implemented gradually in the light of developments in economic activity and prices and would not be based on a predetermined time schedule.

Many members commented on the Bank's communication with market participants
that, under the system in which decisions were made by votes after thorough discussion
among the Policy Board members, the information that the Bank should provide was its
assessment of economic activity and prices and its basic thinking concerning the conduct of
monetary policy. They also said that the Bank should make efforts to further promote
understanding of this point among market participants. Many members referred to the
importance of providing the market with appropriate information in conducting
forward-looking monetary policy based on the "New Framework for the Conduct of
Monetary Policy." From this point of view they thought, after discussing its views
thoroughly and formulating them, the Bank should explain clearly, in the April 2007
Outlook Report, whose projection period covered until fiscal 2008, the outlook for
economic activity and prices and its risk assessment, and the basic thinking based on them
concerning the conduct of monetary policy.

One member added that the Bank should again explain well in the April 2007 Outlook Report the relationship between its "understanding of medium- to long-term price stability" and its conduct of monetary policy.